Schroders bets on TaiwanÆs new government

Schroder Investment Management has turned more bullish over Taiwan equities.

Louisa Lo, head of Asia equities at Schroder Investment Management, was already warming up to Taiwan in February due to attractive valuations at the time. In March, Schroders raised its weightings of blue-chip electronics stocks such as Hon Hai, TSMC, and Siliconware because the indiscriminate sell-off in the past created good buying. The $235 million Schroder ISF Taiwanese Equity has since adopted a more balanced portfolio through its exposure to domestic consumption stocks, select asset plays and stocks with strong dividend yield support.

Political deadlock and structural problems were among the major obstacles to Taiwan's economy. Private consumption and fixed-asset investment have been weak due to poor consumer and investment confidence. Exports have been the only positive so far, but are also facing increasing headwinds.

What has changed recently is the victory of the Kuomintang (KMT) or Nationalist Party in the March presidential elections. For starters, President Ma Ying-jeou began his rule with a historic offer to reopen dialogue with China, which claims the island as its territory, while promising to maintain self-rule and a distinct international profile.

Schroders is neutral on Taiwan within an Asian equities portfolio. This weighting was upgraded from underweight in the second quarter, after Ma was announced as the new president.

ôWith the KMTÆs landslide win, domestic confidence is likely to improve,ö Lo says.

Disappointment in local politics has continuously driven capital out of the country, Lo notes. Like investors who have already placed their bets on Taiwan post-elections, Lo is hoping the improvement on the political front will at least keep capital in and encourage the influx of fresh money into the market.

The new governmentÆs attempt to strike a balance with China and its own people has been received favourably by investors. After all, tensions with China have long been a risk factor when investing in Taiwan.

The stand-off with China has affected financial markets through capital flight, lack of corporate investment, loss of talent to the mainland, distortions to monetary policy and domestic liquidity, and the opportunity cost of a lack of tourists from the mainland.

ôThe thawing of relations could reverse these trends,ö Lo says. And the timing is good because the previous massive underperformance of the Taiwan market shows scope for reversal and valuations are now very reasonable on regional basis, she says.

The improved political landscape is not the only reason for SchrodersÆ optimism. Improvements in the corporate scene have also helped shape the fund houseÆs outlook for Taiwan.

ôTaiwanese companies have become more shareholder friendly,ö Lo says.

In general, Schroders has seen better capital expenditure discipline, an increase in cash dividend payouts and lower employee stock dividend payouts in the past few years. Apart from those in the LCD panels and DRAM industries, most of the technology companies in Taiwan have shown better capex discipline in this cycle and that should boost their return-on-equity.

Many companies have also considered capital reduction û particularly telecommunications companies û and share buyback programmes, such as in the case of Taiwan Semiconductor Manufacturing Company (TSMC).

Schroders believes, meanwhile, that the banking sector has seen the worst of the consumer credit problem.

ôWe believe NPLs have come down from their peak during the consumer credit crisis while the coverage ratio has improved,ö Lo says. ôLoan growth has also bottomed although remains weak. The banking sector has gone through its worst point and is positioned for a recovery.ö

More than half of the Schroder ISF Taiwanese Equity is invested in electronics and financials. The fundÆs top 10 holdings are TSMC, Cathay Financial Holding, Hon Hai Precision Industry, Taiwan Cement, Formosa Plastics, Far Eastern Trade, Siliconware Precision Industries, Taiwan Mobile, Sinyi Realty, and Chunghwa Telecom.